Until annuities are explained, investors may be confused because the identical word is applied to many a variety of financial instruments. This guide will hopefully end your confusion and provde a clear explanation of annuities.
Deferred annuities explained: these are term deposits with insurance companies in return for interest. They are similar to certificates involving deposits at the bank. (Notice: Bank deposits are FDIC-insured although annuities explained are guaranteed by the providing insurance company.) "Deferred" means that both the taking of income and the taxation is deferred to the future.
Two types of deferred annuities explained: fixed and variable. Fixed annuities have these traits:
- Your principal is guaranteed. It is going to never decline.
- The insurance company provides interest to your deposit each year
- The annuity is for a specific period of years that you select
- All interest is tax-deferred until withdrawn
- You may withdraw 10% of your respective balance annually without any cost.
Variable Annuities Explained
A different type of annuity is called a variable annuity. With this type of annuity, rather than acquiring interest from the insurance company, your money is put in into "variable" accoujts similar to stock and bond mutual funds. With a variable annuity, you can earn more than a fixed annuity, or you could lose principal. Variable annuities explained: a tax deferred way to invest in market based funds.
Indexed Annuities Explained
There has been significant growth in sales of index annuities, a hybrid between fixed and variable annuities. In this type of annuity, your current principal is guaranteed such as the fixed annuity, but your interest each year is based on rises in a financial index (for example, the particular S&P 500 index). So, your interest is actually tied to performance in the index, nevertheless, you can never lose principal due to index performance. (You can lose money due to surrender charges assessed if you make withdrawals prior to the completion of the term). Index annuities are generally be subject to a lengthy surrender charge periods. Furthermore, purchasers of an equity index annuity do not get the total rate of return from the related index, as there may be a cap or perhaps limited participation for each annuity about the index-linked rate of return. Index annuities explained--a hybrid of a fixed and variable annuity.
Immediate annuities explained
The immediate annuity has no accumulation phase. You come up with a deposit with the insurance company and immediately commence receiving payments. These annuities are generally suited for elderly investors (age 70 or older) who desire to increase their month to month income.
Has this helped? Now that you have annuities explained, you see that the word "annuity" relates to several types of investments, all with different features.